Evaluating Impairment Risk
Upcoming SlideShare
Loading in...5
×

Like this? Share it with your network

Share

Evaluating Impairment Risk

  • 855 views
Uploaded on

Goodwill Impairment continues its upward climb in 2009 (by Evlon Charles and Seth Palatnik)

Goodwill Impairment continues its upward climb in 2009 (by Evlon Charles and Seth Palatnik)

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
855
On Slideshare
853
From Embeds
2
Number of Embeds
2

Actions

Shares
Downloads
0
Comments
0
Likes
0

Embeds 2

http://www.linkedin.com 1
https://www.linkedin.com 1

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. VALUATION SERVICES Evaluating Impairment Risk Goodwill impairment continues its upward climb KPM G L L P Based on data compiled by KPMG LLP, goodwill impairment rose across a number of industries throughout 2008. This trend continues to have implications for organizations that previously made acquisitions and have goodwill on their balance sheet. This study analyzes goodwill impairment charges more than tripled from 2007 however, nearly one in five companies for public companies from January 2005 through 2008. Additionally, total goodwill in the population studied took an through December 2008 and identifies impairment charges at year-end more impairment charge in 2008. those industries that are more heavily than quadrupled those of the third quarter affected. The study’s aim is to help of 2008. In general, higher impairment Industry Highlights financial executives assess recent charges at year-end may partly be due to The study found that, in the past year, goodwill impairment trends. the fact that many companies’ December the hardest hit industries in terms of fiscal year-end coincides with their annual actual dollar impairment charges taken Goodwill is an intangible asset that arises goodwill testing procedure. Overall, were banks, which accounted for almost from acquisitions where the amount paid 23 percent of the total goodwill impairment for the assets of a company are over and Annual Goodwill Impairment Trend above the fair value of the identifiable net assets of that company. According to SFAS 142, goodwill is not amortized 300 20.0% but is instead tested for impairment at 18.0% the reporting unit level at least annually. 250 16.0% Percentage of total population Goodwill Impairment Still Rising 14.0% 200 Number impaired Based on financial information from 1,604 12.0% U.S.-based publicly traded companies, 150 10.0% goodwill impairment charges more than 8.0% doubled in the last year. Total impairment 100 6.0% charges were $340 billion in 2008, up 4.0% from $143 billion in 2007 and $87 billion 50 in 2006. The number of companies in 2.0% the study recording goodwill impairment 0 0.0% 2005 2006 2007 2008 Years Total Number Impaired Total Number Impaired Percentage Percentage © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trade- marks of KPMG International, a Swiss cooperative. 20748NSS
  • 2. charges, followed by materials, energy, 2008 Goodwill Impairment Industry Summary media, and technology hardware and equipment. In addition, the hardest hit Sample Total Impairment Median Goodwill Impairment Industry Size (US$ Millions) Charge (US$ Millions) industries in terms of the number of companies that recorded goodwill Semiconductor 51 6,535 345 impairment as a percentage of the Technology Hardware and 84 27,171 671 specific industry sample size were: Equipment Media 46 33,819 335 • Semiconductor and Semiconductor Equipment – 31 percent Consumer Durables and Apparel 51 4,276 74 Diversified Financials 51 15,871 468 • Technology Hardware and Equipment – 31 percent Materials 120 46,396 394 Banks 59 77,407 411 • Media – 30 percent Automobiles and Automotive • Consumer Durables and 17 1,232 307 Components Apparel – 27 percent Consumer Services 58 3,619 91 • Diversified Financials – 25 percent Capital Goods 153 25,791 94 Goodwill impairment charges spread to Insurance 78 8,706 410 more industry segments over the last Energy 166 36,409 52 year. When KPMG began looking at Transportation 47 12,098 700 goodwill impairment trends in mid-2008*, Retail 70 11,697 438 it appeared that certain industries were affected by both a large number of Software Services 86 10,492 271 write-downs per industry segment and Pharmaceuticals 52 1,526 205 by higher impairment charges overall. Telecommunications 66 3,939 289 In addition, certain other industries Commercial and Professional appeared to be modestly impacted by 40 622 111 Services the growing impairment trend. In contrast, Household and Personal Products 14 430 430 KPMG’s new data set revealed that Utilities 93 2,301 312 companies in almost every segment of the economy, including pharmaceuticals Food and Beverage 81 4,674 267 and food and beverage, took significant Healthcare 85 3,101 78 goodwill write-downs in 2008. Real Estate 36 1,480 740 It should be noted as well that the median goodwill impairment charge for The survey results indicate that the 85 percent of goodwill in this industry was the companies included in the study has software services and healthcare written off in 2008. On average, goodwill continued to swell. The banks that were industries had the greatest percentage represented about 10 percent of the assets included in the data set recorded a median of goodwill when compared to assets, of the businesses included in the data set, charge of approximately $411 million in with goodwill representing approximately while impairment charges represented 2008, up from just over $49 million a year 29 and 26 percent of total assets, approximately 30 percent of goodwill. earlier. Similarly, the median impairment respectively. Goodwill only represented charge for the materials industry was up about 7 percent of the semiconductor to $394 million from $30 million in 2007. industry’s assets; however, more than * See Evaluating Impairment Risk: A Study of Goodwill Impairment for Public Companies, KPMG LLP,© 2008. E-mail abeto@kpmg.com to request a copy. © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 20748NSS
  • 3. Recent Trends Concluding Thoughts Methodology As the U.S. economy continues to Higher and more frequent goodwill struggle, goodwill impairment remains impairment charges may mean lower KPMG’s study was based on a concern in 2009. Goodwill impairment, earnings and, while this charge does financial information of 1,604 in terms of both the number of companies not directly affect cash flow, it may U.S.-based publicly traded taking charges and total impairment send a negative signal to the market companies across 23 industries dollar losses, increased through the that business units may not be with minimum market capitalization second quarter of 2008 and trended operating in an optimal manner or of $500 million, revenue of $500 sharply upward at year-end. In addition, that previous acquisitions have not million, and assets of $300 million. the size of quarterly charges grew, with performed as expected. With the The size of each industry segment the median charge growing from $70 continued volatility in financial markets ranged from 14 to 166 companies. million in June 2008 to $258 million at and overall U.S. recession, goodwill KPMG’s study evaluated goodwill year-end. The number of companies impairment continues to grow in impairment over a four-year period, recording impairment charges as well significance for an increasing number on an annual basis, and quarterly as the amount of goodwill impairment, of companies. for 2007 and 2008. over the past four years, has generally trended upward. © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 20748NSS
  • 4. us.kpmg.com More Information This analysis was written by Seth Palatnik, partner, and Evlon Charles, senior associate, with KPMG LLP’s Economic and Valuation Services practice. KPMG’s Economic and Valuation Services practice offers a wide range of business services to help companies succeed in the ever-changing global market, including valuation services, transfer pricing documentation, planning and risk management, and economic analysis. For more information on this report, contact: Seth Palatnik Partner Chicago 312-665-2440 spalatnik@kpmg.com For more information on how our professionals can help you address your valuation- related issues, please contact one of the Valuation Services leaders listed below. Midwest Southeast Steven J. Sherman Rick Donnalley Partner and National Leader Principal Chicago Atlanta 312-665-5337 404-222-3174 sjsherman@kpmg.com wdonnalley@kpmg.com East Southwest Howard Scribner Robert Ling Partner Partner Short Hills Houston 973-912-6368 713-319-2192 hscribner@kpmg.com rling@kpmg.com West Geoffrey Dennis Partner Steve Stewart Philadelphia Principal 267-256-2920 Los Angeles gdennis@kpmg.com 213-955-8656 sastewart@kpmg.com The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your financial adviser. © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trade- marks of KPMG International, a Swiss cooperative. 20748NSS